Dr Reddy's Laboratories Ltd (RDY) 2007 Q2 法說會逐字稿

Good evening, ladies and gentlemen. I'm Monali, the moderator for this conference. Welcome to Dr. Reddy's Laboratories conference call. For the duration of the presentation, all participants' lines will be in the listen-only mode.

After the presentation, the question and answer session will be conducted for participants connected to SingTel. After that, there will be a question and answer session for participants connected to WebEx International Center. And after that we will have a question and answer session for WebEx India participants.

I would now like to hand over to Mr. Nikhil Shah of DRL. Thank you and over to you sir.

Thank you Monali. A warm welcome to all of you. I'm Nikhil Shah, the Investors Relation Officer at Dr. Reddy's. Thank you for joining us on the call today as we discuss Dr. Reddy's financial results for the second quarter fiscal year 2007. By now you should have seen the press release as well as the additional financial disclosures, which were released earlier today. The results are also posted on our website on the home page under the Quick Links items.

To discuss the results we have on the call today, G.V. Prasad, our Chief Executive Officer, Satish Reddy, the Chief Operating Officer of the Company and Saumen Chakraborty, our Chief Financial Officer.

Please note that all discussions and comparisons during the call will be based on U.S. GAAP numbers. And the IR desk will be available to answer any queries relating to the Indian GAAP immediately after the conclusion of the call.

To ensure full disclosure, we are conducting a live webcast of this call and a replay of the call will also be available on our website soon after the conclusion of the call. Additionally, the transcript of this call will be made available on our website at www.drreddys.com under the quick links item.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlets without the Company's express written consent.

Now, the Safe Harbor statement. I would like to remind the discussion and analysis during the duration of the call might include forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events.

Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such factors include but are not limited to changes in the legal -- local and global economic conditions, our ability to successfully implement our strategy, the market acceptance of and demand for our products, our growth and expansion, technological change and our exposure to market risk. By their nature, these expectations and projections are only estimates and could be materially different from actual results in the future.

And now to get started, let me turn the call over to G.V. Prasad, our Chief Executive Officer.

Thank you, Nikhil. I would like to thank all the participants for joining us on this call today as we discuss Dr. Reddy's results for the second quarter of fiscal 2007.

The second quarter has been a great quarter for Dr. Reddy's. The authorized generics opportunity in the U.S. has contributed significantly to the overall performance.

However, I am equally pleased to share that we have sustained the strong growth momentum in our core businesses as we continue our efforts to realize the full potential of the underlying businesses of the API, finished dosages and very strong figures for the rest of the world market.

In fact, if you look at the key drivers of our performance over the last few quarters, together they reflect the strength of our integrated business models.

Our core businesses of API and Finished Dosages for the rest of the world market have been growing consistently. Our planned investments in strengthening the pipeline and infrastructure for key markets have started yielding significant results. This is evident from the significant growth in Russia, the sharp turnaround in our performance in India and unlocking of the value of our generics pipeline in the U.S.

Our expansion initiatives in the new markets and new businesses are now showing their strength with both betapharm and Mexico adding to the overall growth of the Company.

In particular, I'd like to highlight the significant improvement in the performance of betapharm during the second quarter, which underscores our belief in the longer-term potential of betapharm

Now let me give you the headline numbers. Revenues for the quarter are at $436m as against $126m for the same period last year. Gross profit margin is at 41% of revenues. SG&A is at $80m. R&D for the quarter is at $9m net of income from our R&D partnerships. Profit after tax is at $61m compared to $19m last year. This translates to an earnings per share of $0.39 as compared with $0.13 for the same period last year.

Let me now discuss the key highlights of the underlying growth drivers, starting with our core businesses. The most satisfying aspect of our performance in the core businesses of API and Finished Dosages for the rest of the world markets has been consistent year-on-year growth for the last five quarters. There has been significant improvement not only in the financial results, but also pipeline expansion, customer engagement, enhanced productivity and geographic expansion.

In the API business we achieved a growth of 36% during the quarter on the back of significant contributions from sertraline. The quality of the product mix improved resulting in the expansion of gross margins for this business.

During the quarter, the Finished Dosage business for the rest of the world markets continued its growth momentum, delivering a very healthy 19% growth.

This was largely driven by the performance of the key markets of India and Russia. As per the ORG-IMS August Moving Annual Total data for the Indian finished dosage industry, we have outperformed the industry average on both -- on volume growth and tracked the industry on value growth, which is a very positive indicator of the growth ahead of us.

The performance of these two businesses once again validates the strength of our core businesses, which continue to deliver sustainable growth, year after year, driven by a unique combination of geographies as well as products.

In the U.S. during the quarter, we consolidated our market share with three key product launches. Combined revenues from simvastatin and finasteride were about $170m. We improved our market share for simvastatin to about 25% and finasteride was 16%. The exclusivity for both these products is expected to end in December 2006. Fexofenadine contributed about $18m in revenue adding to the base portfolio.

While we have thus far benefited from the delay in additional competition, it is likely that we will see new launches in the second half. We have managed the trade off between pricing and market share quite well, which has resulted in relatively higher margins for these products.

In our Custom Pharmaceutical Services business, which largely focuses on the strategic outsourcing needs of large pharma companies, the business continued its momentum into the second quarter as well. We achieved revenue of $36m with a gross profit margin of about 29%. The acquisition in Mexico has paid off quite well. And based on our achievement in the first six months, we are well on track to cross the $100m revenue mark in this fiscal year.

Now let me talk about our performance in Germany. Following the introduction of healthcare reforms and the price cuts by all the significant players in July, there have been concerns from the outlook of betapharm. Added to this in the first quarter, we were at just EBITDA breakeven situation, with the full impact of price cuts being factored in and also due to the one-time shelf stock adjustments.

Against this performance, I am quite pleased to share that in the second quarter betapharm has achieved significant improvement in the -- in its performance. We achieved revenue of $56m as against $44m in the first quarter. We also improved our gross margins to 58% against 53% in the first quarter. As per the Insight Health MAT September, a market research firm in Germany, for the last 12 months period, April to August, betapharm registered volume increases of over 14.4% as against a decline of 2.7% for the entire industry.

The recent product launches have definitely helped to sustain the overall performance. I look forward to the continued improvement in the performance of betapharm in the next two quarters as we continue to push our sales teams to drive volumes and optimize costs in the near term while performing the strategic initiatives for strengthening the long-term potential of betapharm, which I will share later on in the presentation.

A strong pipeline is the key to delivering long-term sustainable growth. At Dr. Reddy's we have made significant investments in the past in creating a strong pipeline and this continues to be an ongoing commitment. We continue to expand our pipeline in each of our businesses quarter after quarter. This quarter we filed eight ANDA filings and six Drug Master Filings globally. Following the collaborations with BioScience and Argenta, I am happy to announce yet another joint development and commercialization deal with Clintec for DRF-1042, our lead oncology compound.

With this introduction let me hand over the discussion to Saumen, our CFO, for an update on financials.

Thank you, Prasad. Good morning and good evening to everybody on the call. Prasad in his discussion has covered the key performance highlights. Let me cover the financial conditions.

Our revenue for the quarter was at $436m, compared to $126m [sic. see press release] in the same period last year. The acquisitions contributed $87m in revenue. Simvastatin and finasteride together contributed $170m in revenue. So excluding the contributions from acquisitions and authorized generics products, the base revenue grew by 42% to $179m as against $126m.

Let me now briefly explain the key growth drivers in each of our businesses. In the API business, the revenue increased by 36% to $63m from $46m last year. The growth was largely driven by the contribution from sertraline. Driven by an improved product mix, the cost margin for the quarter expanded significantly to 41% of revenue as against 32% of revenue. As Prasad mentioned, this level of performance clearly demonstrates the underlying strength of our API business.

In the Finished Dosage business for the rest of the world market, revenue was up by 19% to about $67m as against $56m in the same period last year. This growth was primarily driven by 16% growth in India, as well as an 18% growth in Russia.

In India, during the quarter, we launched two new products, while in Russia we launched four new products including two OTC products. The OTC and hospital segment in Russia has contributed close to 27% of total revenues for this market. Outside of Russia the other markets of Ukraine, Uzbekistan, Venezuela and Romania performed extremely well, adding to the overall growth.

In the U.S. Generics business, overall revenues were at $198m as against $6.5m last year. As I mentioned earlier, simvastatin and finasteride together contributed 170m. Fexofenadine, the other key contributor added another $18m in revenue. If we exclude the contribution of these three products, the base has increased to $10m from $6.5m last year. This reflects the growth in the underlying portfolio.

Our performance in Germany, as Prasad pointed out, has significantly improved compared to the first quarter. Revenue improved from $44m in the first quarter to about $56m in the second quarter. More importantly, the gross margin has improved to 58% of revenues as against 53% of revenue in the first quarter.

Combined revenue from U.K. and Spain are at about $10m, the same level as last year. While we have achieved volume increases for our key products omeprazole and amlopidine maleate, the softening of the prices over the last few quarters has resulted in a flat performance year on year.

On the CPS business, overall revenues were at $36m, as against $3m last year. During the quarter, we added a new product to our Mexico operations, which contributed significantly to the revenue. The overall gross margin was at 29% of revenues.

With a closer discussion on gross margins, the consolidated gross margins of the Company are at 41% of revenue as against 52% of the revenue last year.

On the cost side, SG&A expenses are at $80m as against $38m. Adjusted for authorized generics, SG&A expenses were at 30% of revenue. R&D investment during the quarter was at $9m. This included the benefit of $4.7m of income under ICICI Venture deal and $2.7m from Perlecan Pharma.

Amortization expenses at $9m in line with the first quarter number. These include the amortization related to betapharm, Mexico and other items.

During the quarter, we had a net interest expense of $8m as against a net income of $4m last year. The tax provision for the quarter is at about $16m, or 21% of our pretax profit. This is primarily due to the significant increase in profitability, profits on the authorized generics gain, partially offset by the benefits for before tax liabilities on amortization of intangibles. The profit after tax is at $61m as against $19m last year.

The net operating working capital has reduced to $229m as of end of September from $233m as at the end of June quarter. The receivables have increased only by $4m despite significant increase in revenue during the quarter, due to the improved collection, particularly on the new products. The increase in inventory has been more than offset by the increase in payables, thereby resulting in the overall decline.

With major products already launched in the past quarter, the working capital requirement is likely to normalize in the second half of the year. And we have put in place measures that will enable us to manage working capital efficiently.

With this overview, I will now hand over the discussion to Prasad to make the concluding remarks.

Thank you, Saumen. So summing up the first half, the key highlight definitely has been the strong performance of the underlying core businesses.

Excluding the contributions from acquisitions and the authorized generics opportunity, the revenues have increased by a strong 38% compared to the same period last year. At the Company level, we recorded overall revenue of $142m with profit after tax of about $91m in the first half. This compares with a revenue of $248m and profit after tax of $27m for the same period last year.

The core businesses of API and Finished Dosages for the rest of the world markets have performed exceedingly well driven by improvement in the quality of the market, as well as the product mix.

The API business grew by 29% on the back of interesting new product opportunities. The Finished Dosage business in the rest of the world markets grew by a strong 24% led by growth in India and Russia and well supported by the performance in the other international markets.

The authorized generic opportunity in the US contributed combined revenue of $243m to the overall revenue base. Fexofenadine launched in April this year has contributed $29m in revenue. The two acquisitions added $157m in revenue.

We've settled the Imitrex patent challenge with GSK, which provides us an opportunity to launch the product as an authorized generic ahead of the patent expiry in February 2009. We also entered into a joint development and commercialization deal with Clintec for DRF-1042, our lead compound in the oncology segment. In the first six months, we filed 15 ANDAs and 10 global Drug Master filings.

While our performance in the first half, I would like to highlight that this performance was well supported by the benefit of delaying additional competition in fexofenadine and a substantial part of the exclusivity to these revenues from simvastatin and finasteride and a lower R&D expense.

Also please note that historically our growth in the second half has been relatively lower compared to the first half, especially in India and Russia. The R&D spend is also likely to be higher in the second half compared to the first half. Having said that, in the second half of the current fiscal year, we are looking forward to several new product introductions across our various businesses, including the potential launch of [inaudible] in the U.S.

Thinking of the future, I am excited about the growth opportunities as well as the initiatives that we are driving in each of our existing businesses. I am equally excited about executing on the challenge of commercializing the innovation businesses of discovery and specialty. This would mark a transition to the innovation space, which would help sustain long-term profitable and sustainable growth.

In the API business, there has been a significant improvement in our performance as is evident from the consistent growth in the last five quarters. This is the result of many of the initiatives which I have discussed in the past. We increased the breadth of our product portfolio both in terms of filings as well as launches. We also deepened our relationships with the top tier global generic players as well as regional customers.

We are looking at ways in which we can increase the value proposition to our customers, through a combination of IT based opportunities, value added services and access to a broad and competitive portfolio. To give you an example, we are patenting globally many of our known processes to provide unique opportunities to our customers. We are also aggressively pursuing cost improvements to constantly improve our competitiveness. Based on our inherent strengths, we are confident of achieving a leadership position in the global API industry.

In the Finished Dosage business for the rest of the world, our track record is similar to that of the APIs with six quarters of consistent growth. Our performance in India and Russia over the last several quarters has been quite remarkable and I would like to discuss our initiatives in these markets.

As many of you would recall, a couple of years back we were lagging the industry growth rate in India. This was on account of a combination of factors. There was a general slowdown in the industry growth. There was also uncertainty due to the impending products patent regime. And the marketplace was extremely competitive for new product launches.

We were in fact losing market share for some of our key brands. We were also trying to rationalize our portfolio by improving margins. And we lacked a strong pipeline of launches to arrest this decline. We also experienced some discontinuities as we organized our sales force into various divisions.

From that situation, we have now made a sharp comeback and this is evident from the most recent ORG MAT figures. Dr. Reddy's volume growth was 17% as against the industry growth rate of 15% and in value terms, we tracked the industry growth rate of 15%.

Let me take a step back and discuss what we have done differently in this market to achieve this turnaround in such a short period of time. We introduced several new products. We consolidated our flagship brands, adding new products to address the requirements of all sub-groups of patients. We also increased the size of the field force from 1,100 to the current 1,400. We revitalized the leadership team and also reorganized our sales force, adding new divisions to create greater customer focus.

As a result of all these initiatives, today new products launched in the last three years contribute over 13% to the total revenues. Our recent launches of Razo-D and Omez-D are among the top 10 most successful launches of 2006. We have seven brands in the top 300 including Omez and Nise, which figure in the top 20. In fact, our flagship brands of Omez and Nise are likely to achieve the $20m revenue milestone this year and this compares with $14m about three years back.

Over the next few years, a combination of new product launches, increase in the productivity of our field force and greater focus on global in-licensing efforts for the rest of the world markets will ensure that we continue to outperform the industry growth rate.

The other market that I would like to discuss is Russia. This is definitely one of our consistent and best performing markets, by any standards. Driven by the strong economic growth of the Russian economy and the government buy in program, the industry is witnessing strong growth rates.

Realizing the long-term potential of this market, over the last few years we have made significant investments in several areas. We strengthened our retailing capabilities by doubling our sales force to 184. We also invested in a number of marketing and promotional campaigns. We made investments in opening up new lines of business in OTC and hospital segments.

In the first six months, these segments have together contributed 24% to total revenues, which is quite an achievement in a short span of time. As a result of the above, we have nearly doubled our revenue base over the last three years. In the six months -- in the first six months, we have achieved revenue of $40m as compared to $40m for the whole of fiscal 2004. Despite our strong geographic expansion globally, Russia continues to be one of our key markets and we expect to continue our growth momentum in this market.

Outside of Russia, the other international markets which present interesting growth opportunities include the CIS region, South Africa and Brazil. In the CIS region, we are rather -- we are gaining good market share in many of the markets. Among these markets Ukraine is our largest market, which has more than doubled revenues to $9m in the last three years.

The other interesting market is South Africa. Currently we sell three products and have 17 products pending registration. Our lead product in this market is again Omez, which is the largest selling omeprazole product in South Africa.

In Latin America, Brazil continues to be an important market for us. We are re-entering the market with a renewed focus. We have hired a new management team and have launched our lead biotech product Grafeel, which is deeply observed in this market.

In the U.S. generic segment, we have -- as we have discussed in the past, we are committed to building to a critical size which is not only sustainable but also profitable. Towards this objective, we will continue to drive many of our initiatives over the next few years, even as we make significant progress during this year with our new launches.

We will try to maximize the value of our current pipeline of 55 pending ANDAs in terms of ensuring that we launch all our products on day one. We are also focusing on broad-basing our customer relationships to maximize the opportunity of our future product launches.

In addition we are also looking at ways in which we can reduce the uncertainty on many of our filings involving patent challenges. We are engaging into active discussions with the innovator companies around patent settlements, as well as authorized generic opportunities.

Our recent settlements of Imitrex and Propecia and the authorized generic deal with Merck are outcomes of such a strategy. In addition we are also actively pursuing partnerships with external partners to expand our portfolio and secure near term commercialization opportunities in the areas of injectables, liquids, ophthalmics, oncology and niche products with limited competition. We are currently working with four to five partners in these segments.

Europe is a very important geography for Dr. Reddy's and it has now assumed strategic importance to our overall long-term growth objectives. We have put the leadership team in place and have strong local management teams to support our aspiration of building a significant Pan-European presence over the next few years.

The acquisition of betapharm has provided us with a strong foothold in Germany, which is the second largest generics market globally. In addition, we have on the ground presence in U.K. and Spain. We are also looking at expanding our presence into other markets including France Italy, Portugal and Poland.

Let me now talk about our ongoing efforts in Germany, immediately following the acquisition. We now worked out a detailed integration plan covering several critical areas. People practices, regulatory and business development processes, finance and governments are among the other processes which we have now integrated. I am pleased to share that the integration is progressing seamlessly with benefits visible already.

Over the last few months our teams in India and Germany have started executing on several initiatives. Some of these initiatives will start delivering results immediately, while the others are focused on strengthening the long-term potential of betapharm. The short-term benefits are already visible in the improvement of our performance for the second quarter.

The other important initiative is to create a robust pipeline for building a dominant Pan-European presence over the next few years, by integrating the existing as well as future pipeline opportunities in each of our existing markets with the pipeline opportunities out of India. We are evaluating opportunities for expanding our presence into other niche segments in Germany.

We are also driving our business development initiatives with the common agenda of accelerating growth in the key markets that interest Dr. Reddy's, that of Germany, U.K., Spain, France, Italy and Portugal.

As to the Custom Pharmaceutical Services business, as I have mentioned earlier, we are well on track to achieving critical size of over $100m this year. The acquisition in Mexico has paid off quite well, enabling us to successfully broad-base our customer portfolio in particular innovator pharma companies. Based on the strategic value created by the acquisition and the strength of our growing customer relationships, I am quite confident of the future outlook of the business.

To sum up, we believe that we have laid the foundation for creating a strong and highly competitive global business model. Our integrated portfolio of -- global portfolio of businesses, geographies and products is capable of delivering sustainable and profitable long-term growth on the strength of the following key elements. Consistent growth in revenues and profits in our core businesses of API and Finished Dosage business for the rest of the world markets, strong product development platform both for the generics as well as innovation based businesses, significant growth opportunities in the U.S. and European generic segment, well-defined geography and business expansion strategies through a combination of in-house pipeline, partnerships and strategic acquisition opportunities and finally, business development initiatives to accelerate the growth momentum in our various businesses.

To pursue these growth opportunities it is important that we step up our capacities and our infrastructure. Towards this objective, we are making significant investment plans for creating additional capacity, particularly a need for the generic, APIs and CPS business.

Even as we make progress towards building a global generic business portfolio, we will continue to push the innovation agenda in our Drug Discovery, specialty and Biologics businesses, which will serve as an important bridge as we transition into a discovery-led global pharmaceutical company. We continue to make good progress in expanding the pipeline in these businesses.

Let me begin with Specialty. We are currently working on a product for treatment of onychomycosis. That is fungal infection of the nail. Simultaneously we are evaluating opportunities to commercialize this business in the near term through a combination of in-licensing or acquisition of in-market products.

In addition, we are also pursuing unique product opportunities with strong differentiation based on convenience, efficacy or mode of delivery. These are different from the traditional Specialty products and they are currently not available in the market in these forms. The Red Heart Pill, which is a poly pill and is currently under clinical development, is one such example. I believe that these product ideas could provide unique opportunities for commercialization in many of our major markets.

Let me now talk about our discovery pipeline. The data from the carcinogenic studies completed so far for Balaglitazone has been positive. We are expecting the final report in the next few weeks. The teams at Dr Reddy's and Rheoscience have already started discussing various aspects of Phase III trial design and, all going well, we should soon be commencing the Phase III trials for this molecule.

As we get prepared to move our first molecule into Phase II, along with our partner, we will continue to make calibrated investments in expanding the pre-clinical pipeline in our focus areas - that is cardiovascular and metabolic disorders - into new discovery platforms. We will continue to expedite the clinical developments up to Phase IIA and seek out licensing and co-development opportunities through a combination of [inaudible] joint development and commercialization deals to realize the full potential of our pipeline.

As many of you may be aware, biologics represent a significant opportunity globally. Europe has made significant progress on establishing a pathway for approving biogenerics. The U.S. appears to be catching up with the recent introduction of the legislation in biosimilars.

At Dr Reddy we're making calibrated investments in building the R&D infrastructure and we currently have a pipeline of 10 products in various stages of development for commercialization in the rest of the world markets as the first step.

To conclude it is the tempo of our integrated business model that makes us excited about the future of Dr Reddy's as we transition into a $1m global pharmaceutical organization.

This ends my discussion and we now leave the floor open for a Q&A session and we will be pleased to answer your queries.

Thank you very much sir. At this moment I would like to hand over the proceedings to the Singtel moderator, to conduct the Q&A for participants connected to Singtel. Thank you and over to [Aichu].

Thank you Monali. We will now begin the question and answer session for participants connected to the Singtel bridge. [OPERATOR INSTRUCTIONS]. Right. We have Shubham Majumder from Macquarie, Mumbai. Go ahead please.

Hello. Congratulations to the entire management team at Dr Reddy's for a brilliant set of numbers. I have three questions. One was with regard to Betapharm, you are clearly back on track with regard to Betapharm in terms of the revenue momentum and the gross profit margins there. Can you just tell us what's the profitability like at the EBITDA level?

Shubham this is Nikhil. In terms of EBITDA when compared to the first quarter when it was a breakeven situation, because of the expansion in the gross margins, it's been positive in the second quarter.

But you won't give out the exact EBITDA margin in the quarter is it?

Yes. We are not giving specific details.

Okay. But should we read these as a significant improvement or should we read it as a marginal improvement over the 0% that you registered in 1Q?

I would say it is significant.

Okay. And any kind of color or guidance you would like to throw for the quarters ahead, in the next couple of quarters?

We did $53m.

$56.

$56m and we continue the performance to be a -- we expect our performance to continue at that level.

But qualitatively in terms of the elasticity in the volumes that you're seeing post the price cuts having been taken last quarter, what's the kind of elasticity you're seeing in volume uptake for the generics as a whole in the market and for your production in particular?

We are seeing volume growth at Betapharm. We have not quantified that elasticity as such, but we are seeing volume growth.

Shubham this is Nikhil again. Just to add we already talked about the volume growth that we've achieved as per the market research statistics. It was 14% for the last 12 months as against an industry decline of 2.7%.

Sorry, can you repeat that Nikhil. I missed that.

Yes. It was 14.4% for Betapharm, as against a decline of 2.7 % for the industry.

For the --

Volume growth.

Rolling 12 months is it?

Yes.

Okay. The second question was with regard to U.S. generics and how much of the growth in simvastatin that we see in this quarter will be sustained in the quarter going forward because simvastatin exclusivity gets over in December only?

We are not able to give you guidance on that because we expect the sales to be tapering down as the patent expiry nears. The sales definitely will be lower than this quarter.

Okay. And post the 180 days exclusivity getting over, are you looking at getting into the generic market for simvastatin for all the doses on your own?

Yes we will launch and then start on the ANDA.

Okay. And I'll come back with more questions later. Thanks.

Thank you Mr. Majumder. [OPERATOR INSTRUCTIONS].

Just a request. We'd like to take one question at a time, so that we are able to comprehensively cover all the queries of all the participants.

Sure sir. [OPERATOR INSTRUCTIONS]. Aichu you can hand it over to Angela.

Right. Angela. At this moment there is no further question from participants at Singtel. I would like to hand over to Angela.

Thank you Aichu. [OPERATOR INSTRUCTIONS]. Again, thank you. You have a question from Steven Valiquette.

I'm just curious about the SG&A run rate going forward. If this quarter is a good run rate for the remainder of the fiscal year? Thanks.

Maybe you can take the first half as the run rate for the second half.

Okay. Thanks.

[OPERATOR INSTRUCTIONS]. Your next question comes from Elliot Wilbur of CIBC World Markets.

Good evening. Thanks for taking my question. I didn't hear this addressed in your prepared comments. Could you just talk a little bit about the current pricing positions that you're seeing in the U.S. market place? Whether or not you think that pricing pressures have stabilized, whether they're deteriorating, or whether or not you're actually seeing improvement. Thanks.

Generally speaking the pricing pressure has been intense and that intensity continues for any product which has multiple launches. So we have to constantly look for those unique opportunities, whether they are protected through 180 day exclusivities or through technology barriers or things like that. Products which are plain vanilla, where there are a large number of players, the pricing pressure continues to be very intense.

[OPERATOR INSTRUCTIONS]. At this moment there are no further questions from participants at the international center. I would like to hand the proceedings back to Monali. Monali?

Thank you Angela. We will now begin the Q&A interactive session for India participants. [OPERATOR INSTRUCTIONS]. First in line we have Mr. Nimish Mehta from Edelweiss Capital.

Yes, hi. Good evening everybody and congratulations for a great set of numbers. My first question, if you can just run me through the gross margins at different business segments.

Yes. In APIs for this quarter it is around 41%. Formulation it is 68%. For Generics segment it is 36%. And on Emerging Business segment it is 67%. And for CPS it is 29%.

Okay. My second question is related to simvastatin sales. If you can tell us how much did simvastatin sales contribute to the overall sales? Basically if you can break it up the $170m between simvastatin and finasteride.

No we are disclosing it together.

Last quarter you disclosed it broken up fashion, so if you can do that that will be helpful?

Yes. Nimish I'll get back to you with the split of sales between simvastatin and finasteride.

Okay.

But a substantial part of that is from simvastatin.

Is from simvastatin, okay.

Yes.

Okay. So and you mentioned that you have achieved a market share of 25%. So doing some rough mathematics based on that, it seems that the generic market of Simvastatin is more than $2.5b, which is not really very digestible given the fact that there have been pricing pressures. So does this sale of simvastatin, whatever you have registered, take into account what kind of pricing? Some rough -- I know you are not disclosing pricing, but will that have some charge backs in the next quarter, or how is that going to be?

For the sales which have been recorded we have fully recorded the charge backs. So we don't expect further charge backs on the sales that we've already registered. It is a free player market and some level of competition is there.

Okay. Can you disclose some of the pricing issues there because 70% of price erosion is what we have heard?

We don't want to talk about pricing.

Okay. My third question is related to betapharm. Is there any new law which is likely to pass by the year end, by this calendar year which is again targeting some further price cuts? And if yes, then what is the game plan for Dr. Reddy's on those issues?

We've -- in November there is a price cut expected and betapharm has reacted to that by cutting prices ahead of that. Beyond that we don't see further price cuts.

This quarter again reflects that -- the price cuts that you anticipated in November?

Well, no. It happened in October, so it wouldn't have registered in this quarter.

And Nimish --

Could you keep yourself to one question please because there are a large number of participants.

Fine. I just would like to ask one last question, and that is related to --

One question per participant, please.

Pardon?

If you could limit yourself to one question we could cover others also.

Can I ask one last question, that's it otherwise. Okay. Is there any likely price cuts happening in the Russian markets based on the DLO program?

No, nothing that we are aware of. Our plans are all centered on the same prices.

Okay. Fine. I am done with my questions, thank you.

Thank you very much sir.

May we request all the participants to restrict their questions to only one and then you can come back later on with follow up questions. Thank you.

next in line we have Ms. Laxmi from DSP Merrill Lynch.

Yes, thank you. This is Visalakshi here. Could you share your thoughts as to why you're so confident about Ondansetron, the exclusivity, if you get an approval by the end of the year?

We were first to file on both the patents. And we believe that exclusivity is not triggered so fast. And we are just -- only the approval is between us and getting an exclusivity. Having said that, the approval could go a few weeks this way or that way, but we do expect, based on the FDA's latest thinking, that the summary judgment would not be triggering an exclusivity. So we believe that the exclusivity is reserved for the first to file company and that's us.

Okay. Does that mean that there is no litigation etc. which is pending which one should expect in the next one month or so?

No.

Thank you so much.

Thank you very much ma'am. Next in line is Mr. Pawan from Kotak.

Yes. Hi. Just want to say congratulations to the management for a solid set of numbers. One I want -- the comment --

Mr. Pawan. Can you please speak a bit louder sir?

Yes. Okay. Did you comment that U.S. Generics business the gross margin was 58%?

We said overall. We don't segment it in any [theoretical] view. We said overall Generics the gross margin is 36%. We said Emerging Business, that is actually refers to our biotech and oncology. That's where the gross margin is at 67%, which is more or less in line with Formulation.

Okay. My question now is for Mr. Prasad. Basically, your CPS business and ROW APIs sales have been very strong this quarter. But CPS is like, you know, first half you've done $3b. You said you'll cross $100m. Should we imagine -- assume that CPS is going to be like a similar number in H2?

And ROW growth rate this quarter do you think it is a number which will be recurring for the next few quarters.

CPS I think we should be able to do a similar number in the first quarter. The ROW has some seasonality in that usually. And but for that seasonality I think the trend should continue.

So 100% growth on whatever number was announced during this quarter -- I mean last year?

Are you talking about ROW --

APIs.

And in formulations.

No, ROW API.

ROW API has not grown that much. In fact it has de-grown in the quarter.

There is some INR1.4b which I saw.

No, that is --

Pawan the India, you're right ROW has grown. In fact the North America has de-grown.

Yes.

Okay, the sales are for the U.S. were ROW because the company in question is [Yen].

Okay.

Primarily for the U.S. it is not ROW sale.

So this is the sertraline that we spoke about.

Yes, that what it is.

Are you supplying to the [inaudible].

Yes.

Fine, fine.

Pawan it would be great if you could restrict it to only one question and let the other participants also come up with their questions please.

Sure. Thank you so much and wish you all the best.

Thank you very much sir. Participants are requested to limit to one question in the initial round. Next in line we have Mr. Jesal Shah from J.P. Morgan.

Yes. Good evening and congratulations for the excellent set of numbers. I just have actually one question which is on simvastatin. If you can give us some idea about what is your sense of how much is the inventory in the market and whether you see any issues with the charge backs once the product goes completely generic, hitting in the third quarter, or you've made already adequate provisions for that in the current quarter?

We are looking at this aspect very closely and managing the shelf stock. So at the end of the period shelf stock I've just remembered is not high. As of now whatever, we've sold and recorded, we have covered all our charge backs to the best of our knowledge.

Right. But would you have a sense of how much is the inventory in the market.

It's a matter of a few weeks inventory and we are closely managing that. It's different with different retailers.

Right. Okay. Thanks so much.

Thank you very much sir. Next in line we have Mr. Sameer Baisiwala from JM Morgan Stanley.

I just wondered simvastatin between Q1 and Q2 should we assume that you have exhausted the sales which was meant for the entire first six months?

No, the sales continue. We are seeing good sales even in this month.

Okay. And the last point in on the German price cut which will be effective in October. What is the extent of this price cut?

It's about an average of 4% for the products which are covered under the new Copayment Waiver list.

Okay. Thank you very much.

Thank you very much sir. Next in line we have Mr. Rahul Sharma from Karvy Stockbroking.

Sir, what type of amortization expenses have we grossed so far and what would be the percent that we would be able to do -- we are going to charge in the current year?

Are you on a speaker phone sir?

Yes ma'am.

Then please use your handset, sir.

I will have to speak loudly. What is the amortization charge which we are trying to factor in for the current year?

Every quarter we are putting around $9m.

Okay, thank you.

Thank you very much sir. Next is a follow up from Mr. Jesal Shah of JP Morgan.

Wow, it came pretty fast. Just a question on the German market actually. If you can give us some idea about what in your view has been the year-on-year growth rate in sales? And where do you see the year-on-year movement in the EBITDA margin, or the gross margin, if you can throw some light on that?

And then just to continue on that. Actually because it is related I will just ask at the same time which is --

Only one question.

No, I agree. It's all just related. It's the same question.

It's three questions.

But it's all to do with the same issue. So I guess, I'm just explaining my question actually.

We refuse to answer one part of it.

Okay, no problems. Which is that on the price cuts, so far whatever price cuts have been taken, what does it actually amount to in terms of the -- as a percentage of the total revenues?

Okay I think year-on-year it is about 1% growth in the quarter. So it's relatively flat in terms of overall numbers in spite of the price cuts.

Your question -- the second part of our question was EBITDA margins at the gross margin level. Gross margins are bound -- the current gross margin is around 58%. But the previous figure around the same period was in the 60s.

61.

60 and odd something.

Last part of the question was what was the impact, the overall impact of that. We're still assessing that. But only a subset of our product pipeline -- of our product line has been impacted and that subset was impacted by about 4%.

Yes. This 4% is the new price cuts right? I was actually referring to the cumulative effect of even the first round of price cuts because it was like 24% for a portion of products. So the question is really that is the percentage?

[Inaudible]. I don't know the exact number.

Okay. Thanks so much.

Thank you very much sir. Next in line we have Mr. Neelkanth Mishra from Credit Suisse.

Hi. How are you doing? Congratulations on the great numbers. I have just one question. Because betapharm is I understand clearly a marketing company and given the decline in prices, when will you do the goodwill impairment check and should we expect an impact from that?

I think it's too early to do that. We believe that at least a year has to pass before we do that. And this will depend on the outlook of the Company, the pipeline, the products, all of that.

Okay. Thank you.

Thank you very much sir. Next in line we have Mr. Vijay from BNK Securities.

Good evening. This is Prema Shankaran. Will Wal-Mart entering into the pharmaceutical market will have an effect on the industry?

Wal-Mart has not entered the industry. However part of their supermarkets have this --

Yes. They've announced a new scheme to attract the customers to the store as such. That does not have any impact on the pricing of our products.

They've announced an initiative of $4 for 30 day medication. And most of the products that they've announced are already below this level. So it really doesn't have an impact on pricing.

Thank you.

Thank you very much ma'am. Next in line --

Last two questions if this is okay. We'll take the last two questions please.

Okay, sure sir. The next question is from Mr. Abhay from Deutsche Bank.

Yes. Sir, regarding market share for simvastatin in U.S. is it 25%, did I get it right, or has it gone up by 25%?

it is 25% as per the IMS data.

Okay. Secondly as, in Germany, in the second quarter there has been a huge increase in sales vis-à-vis the earlier quarter. So is it a seasonal thing or you really are stabilized and grown from the earlier quarter?

We have grown from the earlier quarter.

And the last question, is it EBITDA positive now, German market?

Yes. Definitely.

Okay fine. Thank you.

Thank you very much sir.

Last question please.

Last is a follow-up from Ms. Visalakshi of DSP Merrill Lynch.

Yes. Thank you for taking my question. I would like to ask, looking ahead into fiscal '08, could you share your expectation in terms of, apart from Ondansetron, are there any other big ticket launches lined up? I'm talking of how many products do you expect with limited competition or very little or no competition at all?

Visalakshi, I wish I knew the answer to your question. Because you're asking me how many competitors will be there and how pricing will behave and this is impossible to predict, especially in the U.S. market. But having said that, I feel very good about our business. I see multiple launches and I see a few upsides, but I can't predict which ones.

Okay and one final thing for Allegra. With the 30 months stay having expired this month, what is the expectation in terms of number of players likely to be in the market for Allegra, generic Allegra?

I really don't know the answer to this, but as of now we have not seen any new players at least telling the market that 'we're coming forth.' I think Mylan has got approval of one strength. They're waiting -- we've heard from the market that they're waiting for their approval for other strengths. We haven't seen any pressure on the market place saying that 'we're coming in soon' and things like that. So that's where we stand.

Okay. Thank you so much.

Thank you.

Thank you very much ma'am. At this moment I would like to hand over the floor back to Mr. Nikhil Shah of DRL for final remarks.

Thank you Monali. We would like to thank all of you for joining us on the call today. And for any further clarifications please feel free to get in touch with the IR desk either on phone or email. Thank you.

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